Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 183

How Italy’s looming constitutional referendum could be ‘Brexit Mark 3’

No sooner have global markets digested the Brexit decision and the election of Donald Trump as US President (arguably ‘Brexit Mark 2’), another risk event now looms on the horizon: Italy’s constitutional referendum on 4 December. Should voters reject the referendum, it could lead to further weakness in the Euro and an extension of accommodative central bank policy – both of which could, perhaps perversely, aid European equities, at least on a currency-hedged basis.  European concerns could also add to the Trump-related upward pressure on the US dollar.

Italy’s referendum: The growing risk of a ‘No’ vote

In a bid to make the passage of (often tough) economic reforms easier through the Italian Parliament, Prime Minister Matteo Renzi has proposed constitutional changes to effectively reduce the ‘blocking’ power of the upper house Senate. The referendum is scheduled to take place on Sunday 4 December, and Renzi has threatened to resign if the constitutional amendment is not passed.

At this stage, however, the polling suggests the ‘no’ vote is in the lead, not helped by the fact that major opposition parties, such as Berlusconi’s Forza Italia, the populist 5 Star Movement (run by a well known comedian!), and the right-wing Northern League party, don’t support the change. The actual measures proposed are quite complex, and in light of the anti-elite backlash that has been recently evident in the UK and the US, a ‘no’ vote seems likely.

Should the ‘no’ vote prevail, Italian political risks are likely to intensify. For starters, should Renzi resign as promised, it would usher in a caretaker government and bring forward national elections from 2018 to next year. Based on current polling, moreover, there is a strong risk that the 5 Star Movement could be the lead party in any post-election government. The 5 Star Movement’s current political aims include re-negotiation of Italy’s debt and a referendum on Euro-currency membership.

In fact, Italian risks are already being reflected in a widening in the yield spread between 10-year Italian and German government bonds.

Adding to the potential European turmoil, both the Netherlands and France have national elections in March and April/May respectively next year, with a growing risk that populist ‘anti-EU’ parties could take power in either country. Germany also holds its own national election in September 2017, where immigration issues are likely to figure prominently.

Implications for the Euro and equities

There is a growing risk that ‘Euro break-up’ fears could again wash through Europe in coming months, which would have negative implications for the Euro. A surge in political jitters, moreover, would make it even less likely that the European Central Bank will taper its quantitative easing programme anytime soon. Somewhat perversely, however, a weaker Euro and ongoing ECB stimulus could aid European equities, particularly in the export power-house of Germany.

As seen in the chart below, the Index that the BetaShares WisdomTree Europe ETF – Currency Hedged (ASX:HEUR) aims to track outperformed against the main global share index the last time there was significant Euro weakness in the first months of 2015. Since mid-2016, there has again been some global outperformance by this Index, though this has been partly unwound in recent weeks despite continued declines in the Euro. It remains to be seen whether the benefits of Euro weakness on European equities outweighs the drag from heightened political risk as we head into 2017.

HEUR’s Index performance vs. MSCI All-Country World Index (currency hedged)

Source: Bloomberg. Past performance is not an indicator of future performance

Either way, given that European equities appear most likely to outperform in periods when the Euro is weak (based on the above chart), it would make sense to seek such exposure on a currency-hedged basis.

 

David Bassanese is Chief Economist at BetaShares. BetaShares is a sponsor of Cuffelinks, and offers risk-managed Exchange-Traded Funds listed on the ASX such as HEUR. It contains general information only and does not consider the investment circumstances of any individual.

 


 

Leave a Comment:

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Latest Updates

Taxation

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

7 key charts on the state of the Australian property market

The Australian property market stirs fierce debate - often bullish optimism versus crash predictions. But beyond the noise, seven charts reveal what's really driving prices and the outlook for residential real estate.

A simple alternative to the $3 million super tax

Division 296 aims to introduce improved fairness into the superannuation system, yet is overly complex. This scours the world for better ideas and suggests a simpler alternative which can achieve the same goals.

CBA and the index conundrum for super funds

After the hyperbolic rise in CBA shares, super funds are floating the idea of carving out the weightings of ASX bank securities and indexing them within their portfolios. This looks at why that might be a big error.

Strategy

10 policies to drive Australian productivity higher

Here's a comprehensive list of proposed reforms to fix Australia's stagnating economy, including introducing a flat income tax rate, reducing migration, and making childcare tax-deductible.

Interviews

Where to find big winners in Asia

As more money looks for a home outside the US, Asia may soon get some love. Fidelity's Anthony Srom outlines the best places in Asia to invest, including in Chinese consumer names, Indian financials, and Thailand.

Investment strategies

We have trouble understanding the time value of money

We overvalue the present and underestimate the future - it’s a cognitive glitch called hyperbolic discounting. It affects savings, spending, and loans, and it's more common - and costly - than we think. 

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.